November Emerging Markets Debt Update

Monthly Commentary

Emerging markets (EM) sovereign dollar-denominated debt returned 0.05% for the month, bringing year-to-date returns to 9.45%. Local currency debt returned 1.68% during the month, bouncing back from a weak October, bringing year-to-date returns to 12.93%. Corporate dollar debt performed in line with sovereign debt in November, returning 0.03% for the month and 7.62% year to date. The asset class continued to benefit from $2.52 billion in inflows across hard and blended currency funds in November. That was net of $0.05 billion in net outflows from local currency funds. Year to date, inflows across hard, blended and local currency funds have now surpassed $65 billion. New issuance in November totaled $62.11 billion with the majority issued by corporates.

Total Returns Across Asset Classes

Source: Bloomberg; JP Morgan; Data as of November 30, 2017

Looking at the individual asset classes:

Sovereign Dollar Debt: EM dollar sovereign debt returned
0.05% in November. EMBI GD Spreads ended the month at
288 basis points (bps), 4bps wider from the previous month
but still 54bps tighter than at the start of the year.
High-yielding oil producers — like Angola (+3.43% in
November), Ecuador (+3.43%), and Gabon (+2.26%) —
were among the best performers in the index during the
month thanks to a third consecutive month of rising oil
prices. Mexico, the largest index component, was also a major
positive contributor to index performance in November, but
has been more volatile due to NAFTA-related headlines and
fears about a political shift towards populism in the country.
Venezuela was a drag on index performance as it failed to pay
interest on various bonds.

Corporates: EM dollar corporate debt returned 0.03% in
November, in line with EM sovereign debt. Corporate index
spreads ended the month at 272bps, flat on the month and
close to the tights of the year. Year to date, corporate spreads
are 42bps tighter than at the start of the year.

The best and worst performing sectors mirrored October,
with the commodities sectors continuing to outperform and
the consumer sector still exhibiting weakness. We would
note, however, that the weakness in the consumer sector
is primarily due to Teva Pharmacueticals, which represents
approximately 30% of the sector (we have never held any
Teva securities in our EMD portfolios). Corporates broadly
continue to exhibit early to mid-cycle trends, benefiting from
higher earnings and cash flow growth and deleveraging.

Local Currency Debt: Emerging markets local currency debt
bounced back from a weak October, returning 1.68% for
November. This brings total year-to-date returns to 12.93%.
Malaysia was the best performer for the month, benefiting
from stronger oil prices and growth momentum. On the other
hand, Turkey was the worst performer as a combination of
legal, political, and inflation-related concerns weighed on
market sentiment. Flows into the asset class were moderately
negative in November (-$0.05bn), representing the first
month of outflows this year. Inflows for the year remain
robust, totaling $18.81 billion.

New Issuance

Issuance has remained strong throughout the year, with an
additional $62.1 billion in gross supply and $29.3 billion of
net new issuance in November, which is typically a slower
month. The higher numbers seen this year are partly reflective
of the strong appetite for new debt supply as well as a desire
by sovereigns and corporates to refinance existing debt
during favorable market conditions and while the pace of U.S. monetary policy normalization remains moderate. Moreover,
the surge in new supply has been driven primarily by Asia,
which accounts for nearly 50% of gross issuance this year, and
namely by Chinese corporate issuers. Net issuance, however,
remains manageable and we expect this to decline as issuers
continue to focus on refinancing and liability management.